Update on the State of Internet Radio
By 2020, eMarketer estimates that Internet radio will have 180 million listeners and generate $19.7 billion in ad revenue. That can't possibly happen, however, if prohibitively high royalty fees in the United States force the bulk of net radio stations to stop operating in the US or shut down completely.
We'd be remiss not to post an update on the fate of Internet radio during our Online Music Week. When we last wrote about the face off between Internet radio companies and the RIAA's SoundExchange, the organization charged with collecting royalties, a late-night deal had granted radio operators a last minute reprieve. The group decided not to collect on the new royalties, which some have estimated would cost radio stations as much as $500 per listener, per year, giving time for net radio stations to negotiate lower rates.
Since that time, not much has changed. Negotiations between SoundExchange and webcasters are scheduled to begin again in the next week or so. When they resume, the negotiations will be carried out with the prospect of potential Congressional action in the form of the bipartisan Internet Radio Equality Act looming. In a statement issued last week, IREA co-sponsors Sen. Sam Brownback (R-KS) and Sen. Ron Wyden (D-OR) wrote, "If great progress toward a fair solution for webcasters is not made by Congress's return to Washington after Labor Day, then we plan to take expeditious steps toward passage of the Internet Radio Equality Act."
Webcasters, however, are confused as to why the royalty rates from the Copyright Royalty Board were so high to begin with. "One theory is that there is just a misunderstanding about how much money there is in internet radio right now," Pandora founder Tim Westergren told The Age. "It's a fast-growing sector in terms of consumers participating but it's not very profitable. Maybe the RIAA thought we were all making a lot of money and hiding it from them."
Bridge Ratings estimates net radio will pull in $500 million in ad revenue in 2007, but with 50-70 million monthly users in the US, at fees running up to $500 per user, per year, it is easy to see how the numbers don't line up.
For now, net radio broadcasts on, but the threat of eventual silence hangs ominously over webcasters' heads. The National Association of Broadcasters keeps a counter on their site, counting off the days since they made a "good-faith offer" to SoundExchange and have not received a response. That counter now reads 72 days. The fate of online radio may come down to Congressional action in the fall, but webcasters still hope that an amicable agreement is reached over the next month.
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These Internet Radio company founders and managers all claim ignorance when it comes to the hike in royalty rates. Fact - copyright laws and their implications are 28 years old. Does not take a genius to read through the implications and build business models based on those conditions.
If they had done their homework, and the business case for their platforms, maybe they would not be so surprised. I love Internet Radio - use it - and hope to continue using it - and even pay for the service. But all of these guys,and the VCs who funded them have not done their homework. And now they want to cry mammy and take no blame whatsover for screwing up on their business models.
I think you are misinterpreting the data, big boy. $500 per user does not refer to each and every listener to each and every web station. The $500 is a minimum fee that non-profitable businesses must pay. And if you read the article closely, the $500 million annual revenues for Internet radio in 2007 refers to a multitude of revenue streams, most of which do NOT have anything to do with streams to individual listeners, but rather Internet advertising such as banners and buttons.
@AZ: That royalty rates for net radio are so drastically higher than for terrestrial radio (about 4 times) doesn't strike you as at all unfair? The DMCA, as I understand it, exempts traditional radio from additional royalty fees (they only need to pay the composer), but net radio is being held to a different standard.
@Donald: I didn't interpret the data, the Washington Post did. ;)
From the article I linked to in that sentence:
As for where the revenue comes from, that doesn't really have any bearing. The point was to illustrate that royalties exceed revenue, the revenue source wouldn't change that.
Josh - I am not trying to justify the royalty rates - they have been handed down based on the copyright laws that have been in place for a long time. Whether it is fair or unfair - as a business person, one should look at the implications when formulating strategy. I don't want to take direct personal stabs at any of these Internet Radio founders - but there has got to be some blame the take for not creating solutions with viable business models. The writing has been on the wall for a long time now - how come these guys are just raising hell about something that has been in the works for a while?
But I think the point is that many of them created viable business models based on royalty rates in place for terrestrial radio.
Also, I think the net radio folks have been "raising hell" since the CRB began talking about changing the rate structure for them. This isn't an overnight development.
"But I think the point is that many of them created viable business models based on royalty rates in place for terrestrial radio." -
Josh that's exactly what they should not have done! That is my point. Terrestrial Radio and Internet are two different mediums.
Anyway - have a pleasent weekend. Guys like us who pay for Internet Radio services should be the ones duking it out - there's others to carry the cause.
good post!!!
rc
http://tradingtennis.blogspot.com
Here is a thought - the internet has long been called the death of the music industry [ people not buying cd's and downloading music...] wouldn't internet radio also be the down fall of traditional radio?
true Omad. That is part of what is going on in the background here.
For anyone's interest, we are working a deal that is not too expensive for royalties, but then again, we are staying away from music formats, and focussing on talk radio